How SMEs Can Overcome Financial Restraint

Business owners face significant challenges throughout the lifetime of an enterprise, but few are quite as demanding as intermittent and ongoing financial difficulties. Keith Tully examines some of the most common financial issues business owners are facing today along with providing advice on how to protect a business from unnecessary financial restraint. 

Poor cash flow

Without positive cash flow any business is in serious danger of being unable to pay bills as they fall due. Official insolvency is more than just a threat under these circumstances, regardless of how much profit you’re making. This can be especially damaging if you don’t hold sufficient cash reserves.

Poor cash flow is therefore particularly problematic for smaller businesses. However, making regular cash flow forecasts can help you regain control of your cash position. Accurate cash flow forecasting requires precise knowledge of how much you're spending, including a clear understanding of your cash needs in the short term as well as over a longer period.

This information will reliably inform you of potential cash shortfalls in the future, and provides a solid base for sustainable growth. 

Access to funding

Unfortunately, you can face a number of challenging situations with regard to funding your business, including:

• Low business loan approval rates by high street banks, and an often protracted application process – both of these seriously limit your access to ‘traditional’ finance.
• The provision of personal guarantees is also a difficult issue to deal with if you’re a limited company director, as your personal assets are placed at risk.
• Some lenders may use your personal credit rating and the information in your credit file to indicate the risk posed by the business.   
• Excessive penalties can be applied for early repayment of business loans.

Finance products that offer faster application processing and approval, and generally greater flexibility, may be more suitable and offer a strong alternative to high street borrowing.

Online lending, invoice finance, and merchant cash advances are just a few alternative funding options now available to businesses. Crucially, these offer inherent flexibility allowing you to the freedom to plan strategically and with more confidence.

Customer late payments

Late payments are a major source of concern for business owners. They can easily compromise your cash flow and derail plans for growth. When customers pay late it hinders your ability to pay your own bills on time, so it’s crucial to put in place effective systems to control the situation.

Making payment as easy as possible for your customers is an important part of avoiding the fundamental financial difficulties that result from late payment. Essentially, it’s impossible to plan ahead if you don’t know when your own business is going to be paid.

Thankfully, there are several ways to alleviate the strain of late payments by customers, including automated billing, streamlined payment processes, cash flow finance, and a credit control system that quickly provides key information.  

Cost control

It only takes a small increase in the cost of goods or an unexpected bill to negatively affect your cash position. Often, businesses will panic and increase their prices to compensate, but this can have an adverse effect and make you non-competitive in the market.

This is a challenging problem to solve, especially for small and medium sized enterprises which, unlike larger organisations, often have limited working capital available to meet rising costs. So what can you do to address the issue?

Although many of your business expenses will remain the same each month, it’s still important to track them carefully to ensure you’re operating within budget. Proactively scrutinising each cost to decide whether the product or service provides value will streamline your business and encourage profitability. 

Reliable financial information

Without reliable financial data being available for your business, it’s impossible to know precisely how much tax you owe, your stock availability, or even whether you’re turning a profit.

Getting to grips with financial information systems can be demanding, particularly if you’re not tech-savvy. However, the intelligence contained in your management reports and financial statements is crucial, and plays a key part in the decision-making process. Accurate management information offers a reliable picture of your business as a whole, and clearly displays the warning signs that could ultimately lead to a financial decline. 

Successfully navigating your business through financial difficulties such as these is a challenging process, but by being proactive and taking time to examine the figures, you’ll stand the best chance of averting a crisis.

About the Author 

Keith Tully is a partner at Real Business Rescue, part of Begbies Traynor Group plc. Keith has more than 25 years’ experience advising company directors and shareholders on a range of business matters including cash flow concerns, creditor pressure, and raising finance.